A Guide To Essential Contracts For Your Business
To start your own business you will need some basic legal documents to ensure your business runs effectively and protect yourself from any disputes which may arise as your business develops.
In this article, we have tried to come up with a complete and comprehensive list of all contracts that most startup businesses will need at some point in the startup life cycle. Please beware that the legal aspects of your business will depend on what kind of business you are running and its specifics. In this blog, we will try to include what’s needed for most startup businesses to get the ball running and it is up to you to decide whether you will need the contracts discussed below.
Disclaimer: The purpose of this blog is to provide general guidance for a start-up business as to what contracts are required. We do not claim to provide any legal advice specific to your business, as in most cases it will depend on the nature of a startup. Description of what has to be included in the contracts is very generic and is aimed to provide you with some basic understanding of the legal requirements. It is not intended to be completely relied upon.
Here are some contracts that most businesses will need to get started:
Memorandum and Articles of Association
Memorandum and Articles of Association
If you would like to set up a company in the UK – these two documents are essential for the company to be incorporated at Companies House. The requirement applies to private companies limited by guarantee or shares as well as public companies. The content of the documents however will have to reflect a chosen model of your business.
Memorandum of Association – this is a formal legal statement that has to be signed by all the initial shareholders signifying they agree to form a company and become its members.
Articles of Association – the Articles are a set of written ‘rules’ about how the company will be run; agreed by the shareholders, directors and (if you have nominated one), the company secretary. You can adopt Standard Model Articles for private companies which can be obtained from Companies House.
The Articles normally include:
- Interpretation of the chosen model of business: For example, limited liability – the terms will have to be defined clearly to ensure that the members are protected as agreed upon.
- Directors: Their powers and responsibilities, decision-making, appointment.
- Shares and distributions: Outlines input of all the shareholders, decides on dividends and other distributions and capitalisation of the profits.
- Decision-making by shareholders: Such as organisation of general meetings and voting at general meetings, will have to include clauses to prevent disputes.
- Administrative arrangements: Things like indemnity and insurance of the directors, company seals, provisions for employees.
Website terms and conditions – these differ slightly from standard terms and conditions in that there are some legal requirements you must comply with when marketing or selling goods online. These include providing information about who you are and your contact information, company registration number, your prices, and your policy on refunds if you are selling goods online must comply with the distance selling regulations.
Standard Terms and Conditions – standard terms and conditions form the legal basis on which you are willing to do business with your potential customers. Written terms and conditions regardless of the fact whether you have a website create certainty as to the agreement between the parties and form the basis of a contract between you and your customer or client in the absence of a bespoke contract. They also help minimize cause for legal disputes by providing clarity on your company’s position on the following:
- Definitions of all the goods and/or scope of services that your business is providing
- Specification of the payment methods and terms (in other words, how exactly the customers are going to be charged, what for, how often, etc.)
- All the legal aspects such as guarantees, warranties, jurisdiction, intellectual property, third party rights.
- Timing of the whole agreement and what notice is required to terminate it.
- Personal information and the nature of the information collected;
- How this information is used, stored and kept secure by the website/business;
- How the information is disclosed or shared with third parties;
- Policies for deleting data and maintaining accurate data;
“Terms and conditions have an important role to play when it comes to two parties understanding their duties, rights, roles and responsibilities.”
– Emma Jones
Intellectual Property Assignment Agreement
The assignment of intellectual property (IP) basically transfers rights and ownership of relevant IP from one person to another. This is particularly important to avoid any legal consequences when an individual (such as an employee or founder) created intellectual property before becoming a part of the company. An IP assignment agreement transfers any rights in or to the IP created by the individual to the company, and can be applied to any IP including trademarks, patents, logos, designs, or any other IP.
A typical IP Assignment agreement should include:
- Clear definitions of the parties and the intellectual property that is being assigned.
- Warranties (such as whether the person assigning the IP is aware of any infringements and that it is their original work etc.)
- Assurance (from the person assigning the IP that the assigned rights will remain within the company)
- Waiver (to ensure that the agreement remains in place in case of any failures or delays).
Non-Disclosure Agreement (NDA)
This agreement protects any confidential information of your business, including IP and other company information which you may not want to be shared, copied or made public. An NDA is highly recommended before sharing any sensitive or confidential information with external parties, from prospective co-founders to suppliers and investors, and particularly if you intend to have any collaboration with another company.
What is included in an NDA will vary according to the nature and the amount of the information that is being shared, the intended relationship between the parties and the purpose for sharing the information. In addition to normal ‘boiler plate’ contract clauses, an NDA should specify:
- the obligations of confidentiality and the type of information to be kept confidential; and
- any permitted disclosures (such as any information already in the public domain or anything required to be disclosed by law); and
- A term for the obligations.
A Partnership agreement relates to two or more individuals intending to form a partnership (rather than a company limited by shares or guarantee). Sometimes known as a Partnership Contract, Articles of Partnership, or a Founders Agreement, the purpose of a partnership agreement is to have on record details of how the partners intend to run the business and share profits, assets and costs, and to set out the responsibilities and contributions of each partner. Regardless of the degree of trust between the co-founders, an agreement should be put in place from the outset.
A Partnership Agreement should detail:
- Profit and loss distribution (this will outline any initial financial contributions from each partner, and how profits and or losses will be shared between partners).
- Decision making methods and voting rights
- Roles and Responsibilities (time and commitment by each partner should be clearly identified).
- Withdrawals and dissolutions (the partners should be clear on the procedure for if one partner decides to leave, retires, or the other partners want to remove a partner? How will profits then be divided after the outgoing partner has left?)
“A shareholders agreement can be a very useful tool in avoiding and managing and can include provosions setting out a mechanism for the parties to resolve disputes without needing draconian measures such as dissolving the company.”
– Andrew Dowdney
If you have started a private limited company and you are bringing on a co-founder, you will probably be giving shares in the company as part of the co-founder relationship and will therefore need a shareholder’s agreement, particularly before you obtain any external investment. A shareholder’s agreement differs from a partnership agreement mainly because the consideration is actual company shares or stock options and therefore the relationship is structured differently, although the principles behind the agreement such as decision making remain the same.
The agreement can be very simple or more extensive and complex depending on what has been agreed and the stage of the company’s life cycle, but it will often include:
- Number and type of shares – there are various types of shares that can be issued
- Rights and obligations of each shareholder
- Vesting terms – Sometimes founders agree that the incoming shareholder won’t receive their shares immediately but they will ‘earn’ them over time or after certain milestones (i.e. so that they commit to a certain amount of time or achievement with the business). These are known as vesting terms.
- Exit – if your business partner decides to leave, you might want to have the preferential right to buy their shares. You will therefore need to agree how the price will be decided.
If your business is at the stage where you are hiring employees or contractors and freelancers, you will need to have employment or service contracts for each individual employee, which will specify duties and obligations of both your business as an employer and the employees you are hiring.
Generally an employment agreement will specify:
- Dates of commencement and end of the employment or the contract.
- The exact job title and duties of the employee
- Working days and hours (should also consider specifying public holidays and agreed vacations)
- Salary and benefits (should also include the procedure for when expenses are incurred)
- Depending on the nature of work being provided, confidentiality of information, intellectual property, etc.
- Vesting schedules for shares – you may wish to incentivise your employees with shares after a certain amount of time with the business, in which case you would need to set this out in your agreement with them.
If you are hiring a freelancer or contractor, they will not have the same rights and obligations as an employee, however it is important to have an agreement in place to specify how the relationship will work. In particular, this agreement should specify:
- Payment and invoicing
- Any specific deliverables or time commitment you are expecting from the contractor
- Tax – the contractor will be responsible for their own tax obligations
That the contractor is not an employee of your business.